Month: November 2008
SMRT – CIMB
Supported by non-fare businesses
• Within expectations. 2QFY09 net profit of S$42.6m (+7.7% yoy) was within annualised market consensus (S$157m) and our estimate (S$167m). 1HFY09 net profit of S$82.9m constitutes 49.6% of our full-year estimate. 2Q revenue growth of 15.1% yoy to S$227m was ahead of our forecast, mainly driven by higher train and bus ridership, and rental income. Interim dividend declared was S$0.0175.
• Operating expenses. Operating expenses rose 16.9% yoy to S$186m on higher energy costs (+31.1% yoy) and other expenses (+38.6% yoy). Within energy, diesel costs rose 54.1% yoy to S$15.2m, while electricity costs rose 12.9% yoy to S$14.1m. Notably, diesel costs were lower than in 1QFY09 on falling global fuel prices. Staff costs rose 13.5% yoy on higher headcount, salary adjustments and higher CPF contributions. Depreciation was relatively unchanged.
• Operational review. Revenue from train and bus operations increased on strong ridership growth. Operating profit margins improved for all segments, although bus operations were hit by higher diesel costs while taxi operations bore the brunt of diesel subsidies, and higher repair and maintenance costs. Operating losses for bus and taxi operations were S$1m and S$0.5m respectively. LRT operations posted a maiden operating profit of S$0.1m and improved contributions from the Middle East in the Palm Jumeriah operations boosted engineering service revenue. Rental growth was boosted by increased net lettable space (+11.7% yoy) to 26,592 sq m with an average 99.4% occupancy.
• Outlook. We expect revenue to improve further with increased service frequencies to support higher train and bus ridership as more people switch to public transport, while also supported by non-fare segments in rentals and engineering services. We are also mindful of energy costs, although there has been a welcome reprieve with declining global energy prices.
• Upgrade to Outperform from Neutral. We reduce our FY09-11 forecasts by an average 1.6% to account for higher revenue but also higher expenses, resulting in a new DCF-derived (WACC 8.5%) target price of S$2.08 (previously S$2.09). The recent market sell-off has made SMRT attractive again, supported by a dividend yield of 5.7%.
StarHub – CIMB
A weaker 3Q?
Potential disappointment in 3Q
Earnings disappointment. We expect StarHub to report 3Q results (Wed, Nov 5th) that will disappoint both the market as well as our own forecasts. As was the case with M1, the lingering after-effects of MNP could dampen margins and cause an earnings disappointment. For 3Q, we project net profit growth of 0-5% qoq but a decline of – 17% to -21% yoy. Revenue should remain relatively flat qoq but gently climb upwards by 4% yoy. EBITDA margins in 3Q should come in at a range of 27.6-28% which would be a similar level to 2Q08 margins of 27.6% or slightly better.
MNP after-effects, not as significant as other two competitors. The after-effects of MNP will be a key theme in the quarter with attention particularly focused on subscriber acquisition and retention cost (SARC). Unlike its other two main rivals, our view is that StarHub will be less affected relative to the two. It does not offer iPhones at the current moment (though it will by year end) which allows it to save on further subsidies. Also, it has not been as aggressive as M1 in offering promotional activities (e.g, free 6 month subscription for users migrating from other operators, multi-line savers and per-second billings). The investment quarter in 2Q should herald a bottom in margins in 2Q and downside risk to margins should be limited in 3Q.
Tougher operating landscape. Singapore’s advance 3Q GDP numbers showed that it has gone into a technical recession. The government lowered its 2008 GDP forecast to around 3% from 4-5% versus our own forecast of 2.5% for the year. In the last few months, StarHub has voiced concerns over a cutback in spending on telecom services just as SingTel issued similar pronouncements as well. That said, StarHub was still sticking to its 7% yoy revenue growth for 2008 vs our own at 6%.
Expect a 4.5 cts dividend. On the dividend front, we expect another 4.5 cts for 3Q, consistent with the minimum 18cts guidance for FY08 and we do not expect substantial payouts or special dividends. This is predicated on the need to conserve cash for an expensive content battle in 1HCY09 and until the outcome of OpCo is known in 1QCY09. This would bring the total dividend declared to 13.5 cts.
Prepaid and fixed broadband less competitive. Competition remains hypercompetitive in prepaid but should have eased off slightly. We believe that prepaid ARPU is likely to have hit the bottom in 2Q. Similarly, although StarHub has lowered its rates in fixed broadband to match M1’s entry, competition has been fairly rational as competitors have not reacted in kind.
Mobile broadband, a more keen battleground. In the last few weekends, StarHub announced that it would upgrade speeds on its HSPA platform to 5.76 Mbps from 1.9 Mbps for uplink speed by end Dec while downlink speeds will be upgraded to 21 Mbps from 14.4 Mbps by end 2Q09. This ups the ante on mobile broadband in the sector where heavy promotional activities and discounting have been characterising this segment.
Valuation and recommendation
Maintain earnings forecast, target price and UNDERPERFORM. While 3Q earnings could disappoint, we make no adjustments to our numbers currently but will likely make downward revisions once 3Q numbers are released. Our numbers for FY08 are already conservative and below consensus forecasts. Our target price stays at S$2.30 (unchanged WACC of 7.5%) but changes to the target price will be made once 3Q results are announced as we roll forward our valuation horizon by a year. We maintain UNDERPERFORM on de-rating catalysts of concerns over weaker-thanexpected revenue and the spiralling cost of content, particularly that of football. We advocate a switch into M1 for less risk to earnings and cash flow and attractive dividend yield of 10.5%.
SMRT – DBS
A head above the rest
Story: SMRT’s 2Q results were within expectations. Net profit grew by 7.7% to S$42.6m on the back on a 15% revenue growth to S$227m, arising from increased ridership and rental revenue and others.
Point: The growth in revenue was offset partially by higher operating expenses. Electricity and diesel costs increased by 31% as a result of higher electricity consumption and higher oil prices in 2Q. The Group entered into a new electricity contact from 1 Oct till 31 Mar 09 and the rates are about 30% higher than the preceding contract. It has also hedged about 50% of its remaining diesel requirements at about US$110/bbl. We have already factored the higher cost of electricity into our forecasts and assumed an average diesel cost at a crude oil price of US$105/bbl for FY09F.
Other operating expenses increased by 38.6% due mainly to higher cost of diesel sold and higher operating fees. Its bus operations continued to make an operating loss of S$0.9m mainly due to higher diesel costs. Taxi operations registered an operating loss of S$0.5m, while LRT operations made its maiden operating profit of S$0.2m.
Acquisition of a 49% stake in Shenzhen Zona is expected to complete in 4Q09. Details of expected financial contributions were not shared and we have not factored this into our forecasts.
An interim dividend of 1.75 cents was declared, similar to 1H08.
Relevance: SMRT share price has outperformed the broader market in current times due to the strong ridership numbers, healthy operating results and fundamentals. In our view, the market has priced all these positive attributes in the share price. We pegged our TP at 14x FY10F PER – mid-point of its historical range – equating to $1.60. While we like the company for its defensiveness, we see limited upside for the share price at this juncture. As such, we downgrade to Hold.
SingTel – CIMB
Bharti’s 2QFY09 results
SingTel’s 30.5% associate Bharti’s 1HFY09 net profit of Rs40.7bn (+30.% yoy) came in within consensus estimates but was below ours (See Figure 2 overleaf). The result made up 44% of our full year forecast compared to 47% of consensus. That said, Bharti turned in a fairly strong performance as 1HFY09 revenue increased by 43% yoy on the back of robust subscriber growth of 58.5% yoy. The result was affected by forex loss of Rs5.8bn in the quarter (vs Rs1.5bn in 1Q) and a deferred tax income from a tax holiday of Rs3bn. Stripping that out, net profit would have grown 7.3% qoq and 41.3% yoy.
Revenue growth upwards. Bharti’s strategy of targeting rural users is paying off with steadily rising net adds. Bharti has been capturing a larger proportion of subscribers and extending its market share leadership to 24.6% (+0.4% pts qoq, +1.2% pts yoy), according to TRAI statistics (Figure 1). It captured 29.6% of net adds in Aug, the highest in the industry, compared with Reliance at 19.7% and Vodafone at 20.1%. This has helped it add 8m subscribers in the quarter – a record. This is a run rate that management believes is sustainable as the incremental subscribers are coming from small towns across the nation.
EBITDA margins impacted slightly. EBITDA margins came off slightly (-1.8% pts yoy, -0.5% pts qoq) due to higher network cost. This is attributed to the increase in network sites and the greater volume of consumption of diesel particularly as they pushed into rural areas where obtaining electricity to sites becomes a more drawn out process.
Competition and slower economy are surmountable. Bharti believes that new entrants, be it new or existing operators, would have difficulty in breaking in the market as tariffs are low and have little room to fall, branding would need to be built up and economies of scale are lacking. Although slowing economic growth and inflation is a concern, Bharti opines that telcos services are a substitute for travel. Mobile services are needed in rural areas where infrastructure is lacking and transportation is expensive.
Passive infrastructure. The passive infrastructure business recorded an EBITDA margin of 33.3% for 2Q vs. 36.6% in 1Q. It is in talks to sign up more tenants; Vodafone is already signed up and Idea is in the final stages. There are also ongoing talks with Telenor and Bharti is likely to sign them up given that much of their business model rests on sharing of towers. It has transferred 35,000 towers to Indus while keeping 24,000 towers on Infratel. Bharti highlighted that the listing of Infratel or Indus would only occur after 2 years (Mar 2010) once they have established themselves.
Other updates. Management noted that it had received new spectrum for 3 circles (Tamil Nadu, Bihar and Karnataka), which should alleviate congestion pressures. It has applied for more spectrum in 6 more circles. Bharti added that its Sri Lanka rollout was on track and should launch later on in the year. The recent DTH service launch in 62 cities has been encouraging thus far. It also turned free cash flow positive in the quarter, the first time it has done so.
Valuation and recommendation
Strong execution at Bharti. Bharti continues to deliver and extract profits from first time users in rural and poorer users. Subscriber momentum continues apace as its branding pull and economies of scale are clear advantages in a hyper-competitive market. We continue to view Bharti as one of the more reliable growth driver at SingTel. It is expected to contribute 22% to SingTel’s FY09 PBT.
Maintain earnings forecast, target price and UNDERPERFORM call. Pending the release of SingTel’s 2QFY09 results on Nov 12, we are maintaining our earnings forecast and SOP target price of S$2.37. We maintain UNDERPERFORM as we believe there could be more downside to the stock in the short term due to higher risk aversion towards emerging market assets and volatile currencies. However, we see value emerging over the longer term. Telecom is a resilient business, and SingTel’s key subsidiaries and associates have conservative balance sheets and generate free cash flows.
TELCOs – DBS
Some disappointments ahead
Story: Telecom sector earnings are considered relatively resilient as consumers continue to spend on telecom services. However, lower corporate spending and the potential outflow of workers and tourists (typical pre-paid subscribers) in a slowing economy, lower roaming revenues from corporates and tourists, and not-so-benign competitive environment due to mobile number portability (MNP) are major concerns for the sector.
Point: We have reviewed the outlook for telco stocks under our coverage. Below are the key changes:
SingTel – earnings preview and revised earnings. On Nov 12, SingTel might report 2QFY09F underlying net profit of c. S$875m (-4% y-o-y, +1% q-o-q) that could disappoint the market. We lowered our FY09F and FY10F earnings by 5% each, and they are now 10%-12% below consensus.
StarHub – earnings preview and revised earnings. On Nov 5, StarHub might report 3QFY08F net profit of S$77m (-5% yo- y, +20% q-o-q), towards the lower end of street expectations. We lowered our FY08F and FY09F earnings by 2% and 3%, respectively, and they are now 6%-10% below consensus.
M1 – revised earnings. Our FY08F estimate is unchanged, but we lowered our FY09F profit by 4%. Our revised earnings are 4%-12% below consensus.
Relevance: Although StarHub has a better track record than M1, the 50-60% EV/EBITDA and PER valuation gaps may not be sustainable. Our below consensus FY09F earnings already reflect low expectations for M1. Hence, we do not advocate a valuation gap of more than 20-30%. We upgrade M1 to BUY with a revised target price of S$1.57 (Prev S$1.65) pegged to 10x FY09F PER, and downgrade StarHub to FULLY VALUED with a revised target price of S$2.34 (Prev S$2.50) pegged to 13x FY09F PER. At the current price, M1 offers sustainable 9.7% dividend yield compared to StarHub’s 6.8% yield. Concerns about a possible bidding war for the English Premier League (EPL) in late 2009 is likely to overshadow StarHub’s share price. Our trough valuation for M1 and StarHub are S$1.17 and S$1.67 respectively.
We maintain a HOLD rating for SingTel at a SOTP-based target price of S$2.84. But if we use the current market price (instead of target price) for some of the listed associates, SingTel would be worth S$2.42. We advise investors to accumulate SingTel towards our trough valuation of S$2.25.